Good morning. I would like to welcome everyone to Kennametal's First Quarter Fiscal Year 2017 Financial Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Please note that this event is being recorded. I would now like to turn the conference over to Kelly Boyer, Vice President of Investor Relations. Please go ahead.

Thank you, Denise. Welcome, everyone, and thank you for joining us to review Kennametal's first quarter fiscal year 2017 results. We issued our quarterly earnings press release yesterday evening and it's posted on our website at www.kennametal.com. This call is being broadcast live on our website, and a recording of the call would be available for replay through November 27. I'm Kelly Boyer, Vice President of Investor Relations. Joining me on the call today are Ron DeFeo, President and Chief Executive Officer; Jan Kees van Gaalen, Vice President and Chief Financial Officer; Marty Fusco, Vice President Finance and Corporate Controller; Chuck Byrnes, President Industrial Business Segment; Pete Dragich, President Infrastructure Business Segment; and Alexander Broetz, President WIDIA Business Segment. Ron and Jan Kees will discuss the September quarter operating and financial performance, as well as our outlook for our fiscal year 2017, and will be referring to the slide deck posted on our website. After their prepared remarks, we'll be happy to answer your questions. At this time, please direct your attention to our forward-looking disclosure statement. Today's discussion will contain comments that constitute forward-looking statements and involve a number of assumptions, risks and uncertainties that could cause the company's actual results to differ materially from those expressed in or implied by those statements. These risk factors and uncertainties are detailed in Kennametal's SEC filings. Also, we will be discussing non-GAAP financial measures on the call today. Reconciliations to GAAP financial measures that we believe are most directly comparable can be found on our Form 8-K on our website. With that, I would now like to turn the call over to Ron.

Thank you, Kelly, and we appreciate your interest in Kennametal today. Let me begin on page 2 of the slides that were posted on our website. Overall, I think we're making solid progress. Results for our first fiscal year quarter were in line with expectations, with the exception of the tax rate, which I know investors appreciate can vary due to jurisdictional mix and statutory profitability by geography. To achieve our goals, we have to grow again. We have to lower our costs and we must modernize this company. And we need to do this in today's challenging markets. We're making some hard choices, which will improve the company. Restructuring costs and the charges associated with that are a necessary part of this, and as you can see, contributed to a loss per share of $0.27 in Q1 versus last year's loss per share of $0.08. The vast majority of the pre-tax $32-million charge was from the head count reductions announced only a few months back. We will provide more detail during this call, and detail is in the release. The adjusted earnings per share were $0.11, which is below the year-ago level of $0.14. Needless to say, the company, its success is substantially different today than a year ago. We've had a meaningful divestiture. Energy and mining and markets have contracted substantially. There's been a change in leadership, and the overall structure, operationally, is far different. We also are reporting a new segment WIDIA for the first time, and this means that a lot of work has gone into reallocating and assigning costs for comparability. And compared to last year, tax is a significant negative variance, plus our year-over-year sales mix is worse. And as last year, we had a stronger business pre the collapse of energy and mining-related…

Thank you, Ron. Good morning, everyone. As Ron mentioned, the September quarter experienced continued weakness in end market demand. We are focusing on cost management and improving our productivity, delivering further reductions in cost of sales and operating expenses. Let me walk you through the key components of the income statement, beginning with the quarterly results on slide 7. Remember that I will be at times referring to non-GAAP measures. Please see our Form 8-K and press release for the reconciliations to GAAP. Our September quarter sales were $477 million compared with $555 million in the same quarter last year, a 14% decrease. 9% of that decrease is due to the impacts of divestiture. Of the remaining 5% decline, 3 percentage of organic decline, primarily coming from Infrastructure and 2 percentage unfavorable currency exchange impact relating to the pound sterling and emerging market currencies. Sequentially, sales decreased $44 million or 8% from the fourth quarter fiscal 2016 sales of $521 million, consistent with our seasonal trends. On a regional basis, excluding the impact of divestiture and currency exchange, sales decreased in the Americas 7% and in Europe 2%, offset partially by an increase in Asia of 2%. Our adjusted gross profit margin improved in the current period to 30.5% versus 28.8% in the prior year, mainly due to lower raw material costs and incremental restructuring benefits. Offsetting these positive items were unfavorable business mix in all segments and organic sales decline. Adjusted operating expense was flat compared to the prior year. On lower revenue, our adjusted operating margins increased year-over-year from 4.3% to 4.7% in the current quarter. For the first quarter of fiscal 2017, adjusted EBITDA was $48 million versus adjusted EBITDA of $54 million in the prior-year period. Adjustments for EBITDA are detailed in our earnings release and…

Thank you, Jan Kees. And turning to slide 16 to discuss briefly the updated outlook. As noted earlier, we've increased our outlook to $1.20 to $1.50 per share on an adjusted basis. This compares with the prior outlook of $1.10 to $1.40 per share. The revised outlook now includes an unchanged overall revenue level of roughly flat performance compared to prior year, but we have had a negative sales mix impact of about $0.15 to $0.20 per share for the full year continuing what we experienced in the first quarter. Secondly, we anticipate a tax rate of 20% to 25% compared to the prior outlook. This is about a negative $0.10 per share. Offsetting this is a benefit from the personnel cost reduction activities of roughly plus $0.35 per share. This is 2017 fiscal year benefit of personnel cost actions already identified. In other words, there will be more positive impact, but in next fiscal year. Lastly, we are increasing the cash from operations outlook range, increasing capital expenditures, and the free operating cash outlook remains unchanged. So, to summarize on page 17. We have a solid diversified consumables business with strong cash flow through the cycle. We are going to maintain our conservative capital structure and remain committed to the dividend. New initiatives abound as we aggressively move to simplify the organization and thus simplify decision-making. We are building commercial capability to improve our sales execution, so we can grow again. We do see some green shoots from the market. We are reducing team members and taking out work that was unprofitable, which forces us to think in new and different ways. Overall, we're on a journey to substantially modernize the company across our geographically-diverse operations. The result will be a stronger, more profitable and more agile company. We look forward to showing this in more depth at our November 3 Analyst Day we're hosting in Latrobe. So, now, let me open it up for questions. Denise?

Thank you, sir. We will now begin the question-and-answer session. And, sir, your first question will come from Steve Volkmann of Jefferies. Please go ahead.

Hi. Good morning, everybody.

Good morning, Steve.

Just a quick clarification, Ron, you sort of talked about the $0.35 of benefit from the personnel reductions that you've identified. Is there a potential that you will be able to get more folks over the goal line before the end of the fiscal year, and that number could still go up a little bit in 2017, or are you basically saying that any further benefits would be post-2017?

Well, it's hard to say. I think we wanted to calibrate things at this point. There is potential that we can – that number may increase in 2017. There is potential that the mix impact, that we cited, may not be as bad as it was. So there's a variety of pluses and minuses that are possible still, but this is our best assessment as to how things will play out right now. There's lot of hard work to get the personnel costs out. The timing of that sometimes is challenging. But we are pretty positive about being able to drop $0.35 to the bottom line this year, recognizing that the overall target is still substantially higher than that.

Great. That's perfect. And then maybe – I was a little surprised I mean, we knew WIDIA was under pressure and so forth, but I guess it turned out to be a little bit weaker than I had expected, and the hole seems little deeper than I had expected. I'm just curious. I mean, it feels like a lot needs to be done there. Is this something that can be fixed with volume, and more focus, or do you have to get physical footprint out and so forth? I mean, just a little more color on sort of how you view that, now that it's a separate entity.

Yes. WIDIA will benefit from the hard work we're doing in Chuck's area, okay? Just to be clear, WIDIA only has one manufacturing location reporting to it, and that's our Indian business, Kennametal India Limited. So, in many respects, the lower manufacturing cost modernization work that Chuck and the product line teams are doing there will have a substantial impact on WIDIA's gross margin and gross profits. Simultaneously, with Alexander's leadership, I think we're going to get the business growing again. So, growth will have a positive impact. And, thirdly, there's a modest amount of cost reduction that still needs to be completed, and that is underway and will impact. So, between those three activities, I don't think the starting point is the negative 6.7% operating margin because I think that was impacted meaningfully from a few unusual events. But the starting point still is a modest negative of a couple of percentage points. And from that, we think we can get it into positive territory. It's a journey this year. But, certainly, our longer-term view is to get this business to double-digit operating margins. Not going to happen this year. Probably, mid-single digits kind of next year, and on our way to the 10% and thereafter.

Great. That's perfect. Thanks so much. I'll pass it on.

The next question will come from Ann Duignan of JPMorgan. Please go ahead.

Yeah. Good morning, everybody.

Hi, Ann.

Hi, Ann.

Ron, can you just – I'm a little confused about your statement in the press release that 75% of the previously announced workforce reduction and 65% of the correlating savings have been identified. Are you backing away from the $100 million opportunity? And are we saying that when we get to 100% of the head count reduction, we're not going to be at $100 million, we're going to be at something less than that?

Well, there's a lot that goes into cost reduction programs, Ann. That's the status of where we are at this point in time, okay. What it says is that 75% of the people delivers 65% of the target. Obviously, it would have been great to have 75% of the people deliver 75% of the target. We'll learn more as we go through the year. As we close the year, we'll report on that. Hopefully, we'll get to a 100% of the target. If we don't, we're going to be a whole hell of a lot better off than where we started. And we've got a ton of other savings and savings related programs in a variety of other areas to get. I think there's probably longer term some additional personnel activities that need to be implemented. So we're just reporting on the status of where we are at this point in time. Not backing away from anything, but just being realistic about what we've been able to achieve so far.

Okay. I appreciate that, and I appreciate that it's not a linear process also. Can I ask a more strategic question on WIDIA. Is there any risk from that that's just a flawed business or a flawed business model? Sometimes, highly engineered companies find it difficult to move down their product category rather than up the product category. Have you really taken a good look at the strategic opportunities for WIDIA, and you're comfortable that that's just the cost story, not a kind of we'll never make it in this business kind of story?

Thanks for that, Ann. I think it's a good question, and one that really has been embedded in our organization for many, many years. As you know, we acquired WIDIA back in 2002. So, this is a 14-year-long uncertainty. We're just dealing with it, okay? Whether it is a strategically flawed business model or not, we will determine over time. But the facts would suggest otherwise because every one of our key competitors has multiple brands that attack similar markets. Kennametal was the odd person, odd company out. You're going to hear, or we will communicate over time the importance of getting a couple of bites at this apple. It's also important to moderately differentiate and build in different regions strengths. So, WIDIA will have clear strengths in India. It has some real and clear strengths in North America. It's been weakened by a fairly lackluster level of energy in Europe. Whether we can fix that or address that, not sure at this point. So, the business model and the strategy, in my opinion, isn't flawed. It's been the execution of it in the context of Kennametal that's been flawed.

Okay. I really appreciate your color and your openness to discuss that. So, I appreciate that, Ron. I'll leave now and get back in queue. Thanks.

Thanks, Ann.

Thanks.

The next question will come from Joel Tiss of BMO. Please go ahead.

Hey, guys. How's it going?

Fine. How are you doing?

Good morning.

All right. So, just how do you keep the remaining employees motivated and focused as you make all these sweeping changes?

It's a good question. I must say, in my 15 years or 16 years now associated with Kennametal, I'm going to make a declarative statement and say, that I think people are more motivated today than I've seen them in many, many years, okay. And you might say, how could that possibly be? Because, frankly, we have a lot of very smart people at Kennametal, and you know what, when you have a lot of smart people, they want to be talk straight, too. They want to know what the facts are. They want to know where they stand relative to others and what we need to do to change and improve the company. And I've been talking straight to this team since the day I showed up as the CEO in February. And I got to tell you, it's tough news. It's a bit of tough love. But I think people understand the following; we've lost share, our margins underperform our competitors, we have great products, we have a great brand, we have some great customers, but we need to get at modernizing the company. And when you talk about spending $200 million to $300 million to modernize our factories in order to drive cost improvement, people get excited. And when you talk about simplification of a product line, that has grown disproportionately beyond our ability to profitably produce the hundreds of thousands of SKUs we have, people get excited because they say, we're going to deal with our core problems. So, I may have my head in the sand a bit, but I think – I would encourage people to walk around this place and ask people what they think and they feel like, at least now, we've got a game plan.

That's great. And any updates on pricing trends across the business, and what you're seeing from competitors and hearing from customers?

I think we see periodic price issues that are not in consistent with weak markets. I think in Pete's business, the Infrastructure business, raw material costs have come way down. Some of our contracts are tied to both raw material cost, so our pricing has come down proportionately. In Chuck's business, there's some – a little bit of price competition, but nothing disproportionate. So, I think – nothing unusual. The mix issue that I mentioned in my comments is more product mix and customer geography mix than it is price, but there's a little bit of price in our negative mix impact, just a small amount.

Great. Thank you very much.

Okay, Joel.

The next question will be from Andy Casey of Wells Fargo. Please go ahead.

Thanks a lot. Good morning, everybody.

Hi, Andy.

Hi. I was hoping for some clarification on what seems to be a little bit of a definitional change in slide 10 in this slide deck versus slide 13 in the Q4 slide deck, and it has to do with the consolidated benefits identified for 2016. It moved to $38 million from $79 million. And, in Q4, then the benefits for 2017 moved to $110 million from $101 million. Can you help us understand the difference between the two charts given you added somewhere around $30 million from the head count savings to the $110 million that's identified now for 2017?

Yes, Andy. Basically, the difference between Q4 and Q1 is that Phase 1 is completed and is not in the benefits anymore.

Okay. Thank you. And then, just a question, I know the tax rates move around, but kind of last quarter, you talked about the benefits from the valuation release for this year. Can you help us understand what changed to drive the tax rate guidance up?

The fact that we were not able to realize a benefit when compared to last year made the tax rate, ETR, move up year-on-year. And with regards to the guidance that we provided of 13% to 17% last quarter, and a new guidance of 20% to 25%, ETR, is mainly the result of a shift in the geographical location of our earnings between the plan that we had and the first quarter that we experienced.

Okay. Thank you. And then, lastly, and I realized a lot of work is going on internally to improve the returns, but I wanted to ask a question about the revenue guidance. You talked about negative mix but, at this point, I'm wondering how comfortable are you with that kind of flattish expectation?

We think we're quite comfortable. At this stage, it's consistent with our internal expectations. Actually, our Q1 was almost spot on our internal expectations. So, we did anticipate a modest year-over-year decline in our first quarter. And the reason we're principally not going to back off of that right at this minute, is because we're actually seeing some marketplace success. I mean, if you compare what Chuck and the team did in Industrial versus our leading competitor, I think there's pretty substantially better performance. They might have declined high-single digits in some of the key markets and we grew low-single digits in some of the key markets. So, we think we're making some progress. And the other reason we're going to stay a bit flattish in our view is that the comparables in Pete's Infrastructure business get a little bit better as we go deeper into the year. And frankly the first quarter, he declined 22%. And earthworks which is a pretty huge decline, and that drove a good portion of his overall 10% segment decline. But as we get deeper into the year, the year-over-year comparables improve. So, let's see. It obviously is a risk. That's partly why we took the mix adjustment we did in terms of our outlook. But let's see how it goes.

Okay. Thank you very much.

Our next question will be from Ross Gilardi of Bank of America Merrill Lynch. Please go ahead.

Yeah. Thank you. Good morning.

Good morning, Ross.

Hey, Ross.

Yeah. I just want to understand, Ron, your comments on investing, your plans for – to ensure success in the future. So, is there a sizable cost bucket that we should be thinking about that you're going to need to invest that's going to offset some of these big cost savings buckets that you've presented to the market? I'm just trying to understand if there's a big investment that's got to be made in WIDIA ultimately to turn it around, as well as some of your other businesses that aren't performing to your expectations.

Sure. Thank you, Ross. WIDIA will not get much in the way of capital, except for a small investment in India – or modest investments, I would say, in our India operation. So, the separate reporting segment of WIDIA is mostly a selling organization and not a manufacturing organization. So, I'm clear on that and we get grounded on that. Overall, we think we're going to end up spending somewhere about $300 million in capital to modernize our factories. That's going to happen probably over the next three-plus years. That's necessary capital investment that will result in somewhere between $200 million to $300 million of savings. Not all of those savings will come from the automation and modernization, but they'll help empower some of the savings. It won't be a straight line, and it will probably involve some modest footprint changes also in order to harvest that level of savings. We've got a pretty detailed plan that we will begin to summarize in some depth at our November 3 Analyst Day. It starts with automation of packaging. It moves to better grinding machines, better and more modern centering processes, ovens. In many of our factories, the average age of the equipment is approaching embarrassing levels, to be frank. I think that will allow us to reduce cost and have a better quality end product. But it's not the whole story for the cost reduction. The other side of the story is product line simplification and product line modernization. And Chuck and his team, along with the WIDIA team will be commonizing some product line platforms. We'll also be commonizing some of our powder formulas, because we have too complicated of a powder formula and haven't been utilizing our low-cost manufacturing locations sufficiently. So, a lot of work. And it's not going to all happen in 2018. But at the end of the day, these are the root causes for why this company has not performed to the level that should be happening for the categories we're in.

Got it. Thanks, Ron. I appreciate that. And I just want to ask you about mining as well. I mean, a lot of folks are getting excited about a mining recovery. You say in your press release, you're down 36%, and you don't expect a – you expect the weakness to continue for the foreseeable future. I mean, obviously end market conditions are tough and coal, but are you also facing an insourcing issue from some of your customers as the market hopefully bottoms out?

Ross, I'm going to let Pete answer that question because he's pretty close to it.

Yeah. Ross, thank you for the question. I mean, from a mining standpoint, we have seen stabilization. That stabilization is at a level that we experienced both in Q1 and in Q4. Customers are telling us in the U.S. that we should expect to see that continue at least through the balance of this calendar year. Unfortunately, beyond that, there's still the uncertainty in the market and what customers tell us. In addition to that, if you look into Asia, we have had positive trends there, but I think we're all aware of the objectives of the Chinese to reduce their number of mines from 10,000 to somewhere about half of that and then recent announcements relative to them cutting back production. Now, that said, as Ron pointed out, we do have a variable cost footprint that we haven't fully leveraged. We're actively moving products into the region, as well as partnering with our supply base, so that we have local suppliers to pull our costs down. And I'm very optimistic that this is going to enable us to be more competitive in the market and actually take share in China.

And to your precise question, our customers will insource if we're too expensive. And many of our biggest customers, we've had that conversation with, which is why we're making the kind of cost reduction moves that Pete just referenced, so that they stay buying from us as opposed to insourcing.

Yeah, and I appreciate that, Ron. This obviously is helping to drive the urgency around getting that cost down, so that there is no incentive for them to do that.

And is there insourcing in the numbers as of now? I mean, if you already experienced some of that that have led to the declines that you've seen to-date?

There's something meaningful. And, obviously, we're very close to our customers. There is some activity around that, but nothing significant.

Okay. Thanks very much.

Okay.

The next question will be from Eli Lustgarten of Longbow Securities. Please go ahead.

Good morning, everyone.

Good morning, Eli.

Hi, Eli.

One clarification. You put a 20% to 25% tax rate this year, and I understand the logistics. Should that be – should we take that as a continuation, that would be the normal range for next year and beyond at this point? It used to be the normal range for the company.

Yeah. Correct.

Yeah. Okay.

Yes. But I think that's the right...

Yes. Absolutely.

Yeah. I just want to make sure. Now, could we talk a little bit about certain changes in distribution and selling. I understand you're taking a lot of people out that – it's probably very the sales force but, right now, you have – your biggest customer, your former biggest customer taking on the Sandvik line in the IMC, Iscar line. So, there's a lot of more competitive changes going on in the marketplace. How are you handling that kind of environment when you're taking more feet off of the street? I mean, how do you handle that aspect? And the second part of that question is I understand taking the sales force down, but is the sales force level that you wind up with sufficient to grow the company, or at least getting a new baseline that you have to begin to expand if you want to increase top-line growth for the company?

Thanks, Eli. I'm going to let Chuck to address that.

Good morning, Eli. We have not taken our sales force down substantially. There's been some minor reductions, but nothing out of line with normal attrition. We're very pleased – you see our results in the quarter. We grew organically 3%, a good portion of that was in our distribution channel. And I think as you see as we move our direct to indirect initiative ahead, we're partnering with our customers rather than competing with our customers, and that's a huge positive for us.

I think, Eli, most of the head count reductions that are happening in the company were in the support side of the organization, the corporate marketing teams. There's a variety of support. Yes, there is some small amount of attrition taking place in the actual field organization, but the largest headcounts are taking place also in production and in the factories. The other comment, I would say, is the indirect to direct ratios of activities are very much intended to free up sales time. So, that those sales personnel that used to spend the time stopping by the smaller accounts because they're comfortable stopping by those smaller accounts, because we never allowed our salespeople to effectively compete when it came to really going after the business. We're going to free up their time to go after the big guys, to go after the big targets. Every salesperson in the company is going to have a list of major customer targets that are competitive, that they really haven't spent a lot of time on in their territory. So, stop calling on the small guys, focus on the big guys, and we're going to give you a competitive capability to the big guys to actually grow your business again. We started it. It's beginning to pay some small dividends, but it's a journey. And that's why I said, the longer term getting the company to grow again is a several-year proposition.

Okay. And one question on WIDIA, and maybe a question, the name. WIDIA is not a name that's endemic to Kennametal. It's a Milacron European distribution system that was strong in India that Kennametal bought, as said, over a decade ago. Is there any thought of changing the name or putting more product line, and you go back to the way that they used to do it because it's sort of people don't think of WIDIA and Kennametal in the same venue, these people in the industry at that point. I'm just wondering whether that whole approach needs to be rethought in a marketing sense.

In many respects that's exactly what we're doing. That's exactly what we're doing just like our competitors have several different bites at the apple with their different brand names. The only reason we're talking about it here is because this is the Kennametal corporate call. But trust me when Alexander is out on the street working with the WIDIA dealers, it's a completely separate structure. Alexander do you want to comment on that?

Yeah. [The best] brands that we are having under the umbrella, I think this is also important because WIDIA has in the different regions, different strengths. We have WIDIA-Hanita which has an extremely strong brand recognition in North America and the Europe. WIDIA-GTD, very strong here also in the U.S. and WIDIA very strong in Europe. So, when we go to market, we are a stand-alone organization. Our distribution base is competing with everybody in the marketplace. We have strong allied partners in the global market. And in the market we are separate.

So, does that answer your question, Eli?

It gave me a sense of how you're thinking about the product line. Thank you very much.

Okay.

And the next question will come from Steven Fisher of UBS. Please go ahead.

Thanks. Good morning. Can you give us any more specifics on the $200 million to $300 million of expected savings from manufacturing, productivity, investment, maybe the timeframe for taking some of the actions and the achieved cost savings.

Steven, this is one of the reasons why we're holding an Analyst Day because it's complicated. There's probably a list of 50 to 100 projects involved. It's more of a process change across our organization than it is the big bang project, three projects representing $50 million. It's not going to be that. It's going to be a lot of things that we need to do to change our processes. While we modernize, we also have to standardize, okay? Because if we just modernize without standardizing, we won't harvest the savings. So, suffice it to say, it's complicated. It takes time. And what my general attitude is we're going to go for $200 million to $300 million of savings, and if we get a substantial portion of that, the company is going to be better off. You know we're not going to get 100% of those savings, okay, but we're going to get a meaningful piece of them.

Okay. That's fair. And then, just a clarification related to the more near-term cost savings. Over what time period is that incremental $41 million of ongoing cost savings is expected to be achieved? Is that all going to be in fiscal 2018, I guess.

Yes. I mean, that's our goal. If we fall short, we'll fall short of the rate going into 2018, but we're going to get damn close. That's what we're trying to do.

Okay. Thanks very much.

The next question will come from Walter Liptak of Seaport Global. Please go ahead.

Hi. Thanks. Good morning.

Good morning.

Good morning, Walter.

I wanted to ask about the timing of some of the restructuring benefits. You got $0.09 this quarter. How do you see it flowing through second quarter, back half of the year?

Okay. I think it gets progressively – we obviously have progressively greater savings going into the latter parts of the year. Do you want to address that, JK, just roughly?

Yeah. In terms of the savings, they are somewhat for the second half. I would say that we're probably looking at two-thirds going into the second half compared to the first half in terms of the timing.

Okay. All right. Got it. Thanks. And then, on an offset, I think I heard you say that 2017 bonus comp is going to be higher. And so, I wonder how much was accrued in the first quarter? What are you expecting for 2017?

Well, we don't want to – I don't think we want to report on individual bonus comp accruals and get that level of detail. But what I would say is this is a hurdle that we have to get over, okay, because once we're over it, it's then in our base periods, okay. And it's a vicious cycle for every company. When you're not making your numbers, people don't get paid. When people don't get paid, it's a form of savings that provides a positive to the income statement, but it's de-motivating. So, we're at a point where we have to get over this. It's embedded now in our base period, embedded in our first quarter. It will be embedded in some of the challenges year-over-year. We've got somewhere between $30 million to $40 million of incremental cost in 2017, our fiscal year, that we didn't have in 2016 because of compensation. But we're going to get over it. We're going to get people rewarded. And then it will be in our base period, and we can then harvest the savings totally to the bottom line.

Okay. Great. And if I can just do one more quick one. You talked about some process changes in the final remarks where you've seen that there's unprofitable work that you've stopped doing or you're in the process of stopping doing. I wonder if you've identified a certain percentage of revenue that's not profitable or that you're losing money on? And it's something you're going through a little bit of a PLS? What's the revenue impact from that in 2017?

Yeah. There might be some revenue impact on it, but we don't have a number to share. I think we realize that there's a business out there that's unprofitable, but I have a strong suspicion that we can switch customers to a more profitable part of our product line, with a little bit of work. So, right now, we're not forecasting any negative variance on revenue from that, but we do recognize there are some risks.

Okay. All right. Thank you. The next question will come from Stanley Elliott of Stifel. Please go ahead. Stanley Elliott - Stifel, Nicolaus & Co., Inc.: Hey. Good morning. Thank you, guys, for fitting me in. Ron, quick question for you. You guys have been working hard to take a lot of material costs out of the new products that you are coming up with. It's been a tailwind this year. Can you talk – can it still be favorable to margins even if we see higher input costs, especially in an environment where pricing seems to be a little competitive?

Well, I think what we've done – and the simple answer is we've made cost and pricing per part, a more critical piece of our thinking. It's not just about the end-use activity of the part, the productivity it garners for our customers, but it's actually the initial piece price, and we've just made it a more important part of our thinking. Beyond that, we make thousands of parts, so there's not much more to add than that. Stanley Elliott - Stifel, Nicolaus & Co., Inc.: And, lastly, in couple of the trade shows, you've been very excited about some of the new road milling products you have. Since then a lot of the data points in and around road construction has kind of been a little lackluster. I mean, do you think there's a change in the outlook for that market, not necessarily for the product, but for the overall market as we head into 2017? Thanks.

Pete, do you want to answer that?

I think from the market standpoint, I'd describe it as stabilizing. I think that the confirmation and support for investment over the next five years, particularly in the U.S., has given confidence that things will continue at their current rate for a period of time. As you've mentioned, I see our opportunity with that stabilization actually to grow and do them more profitably with the new products that we brought out. We're going to be talking next week at the Analyst Day about additional products we're bringing into that market. I mean, the opportunity for us is great, not only here – when I talked about in the U.S., but we're taking those products to other markets around the world. We had a very structured approach to how globally we're going to roll out those new products starting in North America, and we're just now beginning to introduce those into Asia. So, I'm very excited about the opportunity there.

Great. Thank you. Last question, I believe.

Yes. Your last question, sir, will come from Julian Mitchell of Credit Suisse. Please go ahead. Ronnie Weiss - Credit Suisse Securities (USA) LLC (Broker): Good morning, guys. This is Ronnie Weiss on for Julian.

Hi, Julian. Ronnie Weiss - Credit Suisse Securities (USA) LLC (Broker): How is it going? Building from the down 3% organic sales to the flat for the year. Can you just give a little more color on a segment basis? The assumption that the Industrial business stays at that low single-digit growth rate, while the other two get better, and WIDIA starts to kind of see some growth there, do you see some acceleration happening in the Industrial business from here on?

Well, I'll take that because I think it's kind of broad company question. My hope is that the Industrial team can continue its positive trend. Okay. But I'm pretty pleased with how they started the year. They can just continue with a similar track like this and stay ahead of our plans and kind of deliver some positive growth. The one negative in the Industrial team is we had a 1% decline in Europe, and Europe is a big market for us. And I'm pretty positive that the WIDIA team won't see the sizable decrease that they had in Q1 in part because we took a bunch of product back from a bankrupt distributor. And so, that contributed to the negative. And Pete's business, as I mentioned earlier, the year-over-year comps get a little bit better, and we're seeing some green shoots as rig counts have stabilized, and when rig count start to go back up, they use our products. Okay. A rig that's not drilling isn't buying anything from us. So, any rig count improvement begins to be a positive trend for us. Ronnie Weiss - Credit Suisse Securities (USA) LLC (Broker): Got it. And then just on that bankruptcy point, can you kind of size what that did to the overall segment profit for the segment? And kind of what the margin rate once you do, what you need to do, and that business kind of settles out at?

I want to avoid that because there's lots of puts and takes in any segment, but it's contributed meaningfully to the results of the WIDIA segment. That's what we've said and that's what the amount of disclosure we'll provide. Ronnie Weiss - Credit Suisse Securities (USA) LLC (Broker): And it doesn't continue for the rest of the year to onetime thing, right?

Bankruptcies usually are onetime things. Ronnie Weiss - Credit Suisse Securities (USA) LLC (Broker): Thank you.

And at this time, we will conclude the question-and-answer session. I'll hand the call back to Mr. DeFeo for his closing remarks.

All right. Thank you very much. We appreciate everybody's interest in Kennametal today. We're focused on getting a little bit better, and I like to remind people about our November 3 Analyst Day. If you can't be there, either listen in or get the material as a follow-up. I think you'll find we're working hard to make this company a little bit better tomorrow than today. Thanks a lot.

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.